Homeowner’s Contract with General Contractor Must Be in Writing—But Not Always

There are some laws that seem to be well defined, or “black letter” law. For example, California Business and Professions Code Section 7159 requires that residential home improvement contracts must be in writing. This applies to any proposed repair or remodel contract where the work will exceed $500.

However, in some cases, the California courts have seen fact patterns sufficient to carve out exceptions to this statute and enforce an oral home improvement contract. Those are generally in cases where no moral turpitude is involved and to prevent unjust enrichment to the homeowners.

The few exceptions were Asdourian v. Araj, which was a California Supreme Court Case, and more famously, Arya Group, Inc. v. Cher. In both circumstances, the perception was that the homeowners were very sophisticated or represented by sophisticated professionals and that the general had performed all or substantially all of the work, the owner had accepted the work or otherwise ratified the oral agreement and therefore the courts enforced the oral agreement despite the statute requiring it to be in writing.

The most recent case was Hinerfeld-Ward, Inc. v. Lipian 2010 (188 Cal. App.4th 86) involving a house in Los Angeles where the homeowners, (the Lipians) disputed the charges in the builder’s last payment application (or what are common referred to as progress payment bills). Apparently, the remodel was quite extensive because the dispute arose over not the main house, but a separate building on the Lipian’s lot that would house a home theater, gym and office. After the dispute, the Lipians terminated the general contractor, who was still owed roughly $200k.

Ultimately, the general recorded a mechanics lien, sued the homeowners to foreclose on its lien and for breach of oral contract, quantum meruit, wrongful withholding of progress payments and so on. The homeowners then cross-complained for breach of contract, negligence, fraud, violation of Business & Professions Code section 17200 (unfair business practices) negligent misrepresentation, recovery on bond, and for a declaration that the oral contract was void.

They went to jury trial and the jury found there was a contract and awarded the general over $200k, plus the jury found the reasonable value of Hinerton’s services was $820k and that homeowners failed to pay that amount. On the flip side, the jury also found Hinerton was negligent, but only awared $1000 to the homeowners. The trial court entered judgment for the general contractor for just over $200k, plus prejudgment interest ($36k) and costs in the amount of $39k. Additionally, Hinerton sought a 2% penalty for the wrongful withholding and attorney’s fees and was awarded $54k in interest and $200k in attorneys fees.

The Lipians appealed and argued that the chain of cases on the “exception” to having a written contract were all circumstances where the homeowners had been sophisticated real estate or construction professionals.

The Hinerton Court noted that though Cher was an entertainer and not a developer, she had been represented by counsel in negotiating the terms with her general. The Hinerton Court clearly felt that the Lipians were sophisticated individuals and though not real estate developers, they had an onsite representative, their architect who was a sophisticated real estate or construction professional who was overseeing the project and who reviewed the first 19 progress billings and approved them for payment which was analogous to the Cher situation in the Arya case.

ATTORNEY'S FEES

The big issue was attorney fees. Normally, in an oral contract,the parties would not have the right to recover attorney fees, even if they were the prevailing party. However, when a homeowner wrongfully withholds more than 150% of a progress payment, there is a penalty.

Section 3260.1, subdivision (b) provides, “Except as otherwise agreed in writing, the owner shall pay to the contractor, within 30 days following receipt of a demand for payment in accordance with the contract, any progress payment due thereunder as to which there is no good faith dispute between the parties. In the event of a dispute between the owner and the contractor, the owner may withhold from the progress payment an amount not to exceed 150 percent of the disputed amount. If any amount is wrongfully withheld in violation of this subdivision, the contractor shall be entitled to the penalty specified in subdivision (g) of Section 3260.”

The Hinerton court went on to note: “The incorporated statute, Civil Code section 3260 (section 3260), does not use the term ‘penalty.’ It requires the owner or general contractor to make prompt payment of retention fees withheld by the owner on completion of the project. (§ 3260, subds. (b), (c), (d).) Subdivision (g) of that statute provides: “In the event that retention payments are not made within the time periods required by this section, the owner or original contractor withholding the unpaid amounts shall be subject to a charge of 2 percent per month on the improperly withheld amount, in lieu of any interest otherwise due. Additionally, in any action for the collection of funds wrongfully withheld, the prevailing party shall be entitled to his or her attorney’s fees and costs.” (§ 3260, subd. (g).)”

Normally, within any homeowner dispute with a general contractor, there will be two types of payment dispute—one for the last progress billing, and one for the retention. It is typical for homeowners to withhold a percentage of the total bills, such as 5% or 10% until the job is completed.

The general contractor in turn passes this on to his subcontractors, withholding an equal or even larger percentage. Ostensibly, this system is to ensure performance of punchlist and touchup items that are required at the end of every job.

The code sections above address a penalty for withholding both types of payments – one for the progress payment, which is a 2% penalty in lieu of interest and on wrongfully withheld retention payments, attorney’s fees for trying to collect.

The Lipians argued that to award both the 2% penalty and the attorney’s fees was double dipping and that the statute only referred to one penalty, which was the 2% penalty and that the attorney’s fees award against them should be stricken.

The Court noted that the code sections were drafted ambiguously so they looked to legislatively history and concluded that both penalties could apply and did so.

The result? The Court affirmed the award of attorney fees and the penalty interest and the homeowners were whacked with a bill of nearly half a million—which did not included their own attorneys fees and that the fact that they lost the appeal and to pay Hinerton’s costs for the appeal as well.